Arkansas Border Cities Could Be Affected By Other State Income Tax Changes

Fort Smithians wouldn’t necessarily and immediately benefit from a future elimination of Oklahoma’s income tax.

Oklahoma Gov. Mary Fallin may in early 2012 propose a plan to eliminate or phase out the state’s income tax, according to Fallin spokesman Alex Weintz.

He said she and other state officials are “seriously considering” a change in the state’s income tax, but it’s too early in the conceptual phase to talk in depth about the possible changes, Weintz explained.

Weintz said part of the ongoing discussion includes how the state would adjust spending or generate revenue from other sources to make up for the reduced tax revenue. The state generated $2.603 billion in individual income tax revenue in fiscal year 2009. (Individual income tax collections in Arkansas totaled $2.739 billion in fiscal year 2011, about 48% of total tax collections during the year.)

Weintz said Fallin may outline a plan addressing the state’s income tax in a late January address to the Oklahoma Legislature. The Oklahoma Policy Institute has argued against eliminating the state income tax.

Also considering a reduction or elimination of state income tax is Kansas Gov. Sam Brownback. A petition drive has begun in Missouri to seek voter approval of a state constitutional amendment to eliminate the state’s income tax, according to this report at Stateline.org.

STREET DIVIDE
In Arkansas, Texarkana residents are exempt from paying income tax because they are connected to Texarkana, Texas — and Texas is one of seven U.S. states without an income tax.

“It would be huge for Fort Smith,” John Taylor, senior vice president in Fort Smith for Sterne Agee & Leach Inc., and board member of Fort Smith-based Benefit Bank, said about a border tax exemption for Fort Smith. “You can currently be a resident of either Texarkana, Arkansas or Texarkana, Texas and be totally exempt from Arkansas income tax. I think I know how some of our civic leaders would love to be able to tell prospective employers that their employees would be exempt from state income tax if they located their facilities in our region.”

But, Taylor added, it may not be that simple.

To qualify for a border town income tax exemption, existing Arkansas law requires the city to be “divided by a street state line from an incorporated city or town in an adjoining state in which the other state does not levy a state income tax, the qualified electors of the Arkansas border city or town may vote to equalize the state taxes paid by citizens in the border city or town in Arkansas with the tax advantages of the citizens of the adjoining city or town in the other state …”

TAX EQUALIZATION
To “equalize the state taxes,” Fort Smithians would have to vote on a 1% sales tax increase in lieu of not paying income tax.

Arkansas Sen. Jake Files, R-Fort Smith, said if Oklahoma officials eliminate the income tax he would push for allowing Fort Smithians to have a choice.

“I would be in favor of putting the enabling legislation in place and then let the people of Fort Smith decide,” Files said. “I think it would be foolish to not have the tools in place to do that if we wanted to.”

Files said he believes income tax elimination would encourage people to come to Fort Smith and stay, but isn’t sure he would support the exchange of a higher sales tax in the city for no income tax.

“I’d like to see the numbers before I would commit to that,” Files said.

TAX COMPARISONS
The numbers are important.

State’s without income taxes have to make up the revenue in other areas. For example, Texas has some of the highest property tax rates in the nation.

However, the seven states without an income tax have a lower state-local tax burden than Arkansas, according to a February 2011 report from the Tax Foundation. The report shows Arkansas ranked 14th in terms of state-local tax burden with an average 9.9% rate for all citizens. Following are how the seven states without an income tax rank in the Tax Foundation report.

Washington (29th, 9.3%)
Florida (31st, 9.2%)
Texas (45th, 7.9%)
Wyoming (46th, 7.8%)
South Dakota (48th, 7.6%)
Nevada (49th, 7.5%)
Alaska (50th, 6.3%)

Oklahoma ranks 37th in the report with an 8.3% rate. Of the states contiguous to Arkansas, none have a higher state-local tax rate.

The top five highest rates in the report are: New Jersey, 12.2%; New York, 12.1%; Connecticut, 12%; Wisconsin, 11%; and, Rhode Island, 10.7%.

Michael Tilley with our content partner, The City Wire, is the author of this report. He can be reached by e-mail at [email protected].